News recently came out that Warner Bros. Discovery (WBD 0.72%) has received interest from suitors looking to buy the business.
Reportedly, management and the board of directors spurned previous offers from parties including Paramount Skydance. However, management indicated that it's open to exploring various options to "maximize shareholder value," which would indicate it's listening to takeover offers.
While the news makes for exciting reading, it's time to dig into the company to better determine what decision investors should make.
Image source: Getty Images.
A big stock price reaction
Since the start of the year, Warner Bros. Discovery's share price has more than doubled, increasing 101.1% through Oct. 22. Much of the price movement has occurred since the start of September, however. That came about as rumors swirled about a potential takeover.
NASDAQ: WBD
Key Data Points
Additionally, certain notable investors took positions in the company. That includes the well-regarded Stanley Druckenmiller, who bought shares in the second quarter via the Duquesne Family Office.
Of course, you shouldn't invest merely because others have bought shares. Still, it's an interesting business, and others clearly feel that the stock is undervalued. That makes it a good time to take a step back to learn more about Warner Bros. Discovery's underlying business.
The business
Warner Bros. Discover consists of cable channels (linear network operations) including TNT, TBS, CNN, TLC, and the Discovery Channel. It also has a direct-to-consumer (DTC) business that has premium pay TV and streaming services like HBO. Finally, the business includes studio operations that produce films and television programs.
That's a sprawling media enterprise, but it's not running on all cylinders. In an effort to maximize shareholder value, the company announced in June that it plans to separate into two separate public companies. One business would include the streaming and studio businesses (including Warner Bros., DC Studios, HBO, and HBO Max). The other, Global Networks, would house the television networks.
The company plans to continue pursuing the creation of two separately traded public companies while exploring a sale.
Meanwhile, the business as a whole has struggled. Second-quarter revenue, adjusted to remove foreign currency translation effects, was flat compared to a year ago, at $9.8 billion.
The studios and streaming business and global linear networks' results have greatly diverged. Quarterly revenue at the streaming and studio businesses increased 12%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) grew more than tenfold to $790 million. However, the global linear networks segment's revenue dropped 9% to $4.8 billion, and adjusted EBITDA fell 25% to $1.5 billion.
Investor decisions
Certainly, there's a lot going on with Warner Bros. Discovery. With multiple parties interested, a bidding war could emerge. That could drive the stock price even higher.
Alternatively, the company could go through with its plan to split into two different companies. You could own the more attractive studios and streaming business that's growing revenue.
However, it's tough to make investment decisions on speculation about what might happen on the deal front. After all, potential acquirers could back out once they do their due diligence. Or their interest could fizzle for any number of reasons, including broad economic concerns and financing.
With so much up in the air, and the business not performing on all cylinders, I'd pass on buying the stock. You may leave money on the table if an entity does buy Warner Bros. Discovery, but that's too difficult, if not impossible, to predict.
You're better off looking for long-term investment opportunities in companies that you believe will do well rather than hoping a corporate transaction bestows a jump in price that provides a quick profit.
